Wisconsin Regulators Fall for Populist Rhetoric

The Public Service Commission of Wisconsin missed a golden opportunity on September 30.

Rather than position the state to reap the benefits of the twenty-first century information industry, the PSC chose to retain an outdated price control structure that holds back investment, props up weak companies, and creates little or no consumer value.

The PSC decision keeps in place most of the mandated wholesale discounts that incumbent service providers such as SBC Communications must provide competitive local exchange carriers (CLECs) such as AT&T. The current rate scheme gives CLECs heavy discounts on the wholesale purchase of local loops--the last-mile connections--from the incumbents.

The PSC decision will allow these monthly rates to rise by only a small amount, between $1.50 and $2.00. Before the increase, the state’s wholesale line rates ranked fifth-lowest in the country. After the hike, they will remain near the bottom. CLECs say without such low wholesale prices, retail phone rates would skyrocket and competition would flounder and die. But the facts tell another story.

Competition is flourishing outside the regulated world of incumbents and CLECs. As a group, SBC and its fellow Bell companies lost 28 million lines since the end of 2000. The number of wireless phone accounts today exceeds the number of conventional incumbent wireline accounts.

Cable television companies now offer telephone service over their networks, and not only in big cities. In Omaha, Nebraska, Cox Communications has supplanted local incumbent Qwest as the leading phone service supplier.

The PSC decision came on the same day AT&T and Vonage cut rates on their unregulated Internet telephony services, which completely bypass the local loop infrastructure. While Internet telephony services make up a small part of the market at the moment, there is rapid uptake in the consumer and business sectors. “VoIP”--short for Voice over Internet Protocol--is becoming a household term.

All this challenges the claim that steep wholesale line discounts are Wisconsin’s only defense against the re-emergence of the monopoly Bell System. On the contrary, all indications are that telephone competition is here to stay and that the law of supply and demand--not government-set wholesale rates--is protecting consumers.

Price controls, in the long run, never accomplish very much for consumers. While providing the appearance of choice, they discourage investment and foster a cumbersome, expensive asymmetry between regulated and unregulated companies that translates into slow, uneven deployment of new network technology. If the CLECs are in as precarious a state as they say, it is because the regulations discouraged them from investing in their own network infrastructures. The real competitive pressure they face is coming from largely unregulated companies who have built their own networks.

Unwilling to become full-fledged competitors themselves, CLECs distract the public with populist slogans against big telephone companies. Their strategy depends on convincing regulators and consumer activists to ignore or compartmentalize wireless, cable, and Internet telephony.

Unfortunately, Wisconsin regulators fell for the rhetoric. They failed to acknowledge what consumers, businesses, and investors already know: There is robust competition at all levels of the telecom market. Despite the PSC’s assertions to the contrary, it is not in the public interest to maintain price controls that serve a subset of service providers who, by their own admission, would not otherwise be viable.